People walking pass blocks of apartments for the low income in Hanoi. Photo by Ngoc Thang

Vietnam must develop its markets to foster greater labor productivity and avoid the middle-income trap, economists advised at a recent conference.

“Market regulations are incomprehensible and the business environment remains distorted,” Tran Dinh Thien from the Vietnam Economics Institute told a conference on avoiding the middle-income trap on Tuesday.

The country has not yet realized its market potential, stifling the development of increasingly competitive enterprises. Taken together, Thien said, this is the cause of the nation's stagnant labor productivity.

Private firms are the most important force in a market economy, but they have not received proper assistance, he said. “They have not benefited from state incentives and cannot participate in the many fields they can benefit so well from.”

The state-owned sector has benefited from preferential treatment, but they have proven highly ineffective, failing to create as many jobs as expected, Thien said.

Echoing Thien, economist Pham Bich San said: “Because the state-owned sector plays a leading role in the economy, there is no chance of increased competitiveness.”

Nguyen Dinh Cung, Acting President of the Central Institute for Economic Management, said state-owned enterprises should not participate in business sectors that private firms can thrive in.

Vietnam's legal system should be reformed accommodate a market economy, Cung added.

In addition to ensuring the development of a thriving market economy, the focus on boosting the industrial sector is very important to increasing labor productivity, helping Vietnam effectively avoid the middle-income trap, economists said.

Cung said economic growth has slowed down over the past few years, increasing the income gap between Vietnam and other Asian countries. It is because of the country’s low labor productivity, which is equal to just 13 percent of Japan's, 35 percent of Thailand's and 50 percent of Indonesia's.

Vietnam has lagged far behind other Asian nations in economic development as it has yet to develop an industrial sector. GDP growth has hovered around 7.5 percent for just a decade. Meanwhile, many other countries have sustained a higher level of economic growth for 30 consecutive years, he said.

The country has not yet paid enough attention to industrial modernization as the service sector continues to expand, he said. “If we do not accelerate industrial modernization, labor productivity will remain low. At that point, we won’t have to worry about falling to a middle-income trap; we'll have to worry about falling into poverty.”

Thien said industrial modernization can only take place following improvements in support industries. The support sector accounts for up to 80 percent of total industrial value. However, Vietnam has made the mistake of dismissing the support sector as an auxiliary investment and has not focused on developing it.

Thus, the economy has accrued little added value and has heavily depended on natural resource extraction and outsourcing, he said. “By failing to develop the supporting sector, Vietnam will be unable to improve its industrial sector or participate in the global industrial supply chain.”

Cooperation with foreign firms

Japanese economist Kenichi Ohno said Vietnam hasn't paid enough attention to boosting labor productivity. Most sectors lack comprehensive productivity statistics. The General Statistics Office should implement regular surveys on labor productivity and wages in sectors to issue official and reliable reports on them.

The country should also cooperate with foreign invested enterprises to improve its technological capacity. The two good examples of this strategy are Thailand, which successfully cooperated with foreign invested firms to receive technology transfer and Malaysia, which built their technology sector by themselves and eschewed cooperation with foreign firms. Ohno believes Thailand’s strategy offers as a better model for Vietnam.

The Japanese economist believes Vietnam should focus on building up fundamental technologies and common practices like energy conservation and business management improvement. It shouldn't consider high-priced, high-tech solutions.

Ohno said it will take a long time for the country to transition to a high-tech nation.

In order to avoid the trap, Vietnam needs to shift its priorities. The country should focus more on implementing existing policies instead of continuing to issue new ones. At present, Ohno regards its current policies as inflexible and incompatible with international standards.

Ultimately, he said, changing the minds of Vietnam's leadership is critical. Instead of organizing endless conferences on the middle-income trap, he warned, the government should draft detailed action plans with fixed terms and improve oversight on their implementation.

In 2008 Vietnam's per capita income reached US$1,070, making it a “lower middle-income” country. The World Bank classifies those with an average income of $1,036-4,085.

According to the bank, a typical middle-income trap occurs when a country's GDP per capita cannot exceed $4,000-6,000 for 42 years after entering the middle-income bracket.